News

Price elasticity of demand

Question 1

The price of DVDs today is £200, and the
quantity demanded is 4m. Next year the price falls to £180 and
the quantity demanded rises to 6m.

The price of Pens today is £1, and the
quantity demanded is 1m. Next year the price rises to £1.10 and
the quantity demanded falls to 950,000.

The price of The Times today is 40p, and
the quantity demanded is 2m. Next year the price falls to 30p
and the quantity demanded rises to 2.2m

Question 2

RCO Ltd is a UK based electronics manufacturer and
retailer. Its main products are Netbook computers, PCs and Electronic
Calculators. The current price of the Netbook is £500, the PC is
£800 and the calculator is £40. This year the firm sold 10,000 Netbooks,
20,000 PCs and 1 million calculators.

In an attempt to improve revenue the managers of the
firm have decided to increase all prices by 10%. Market research has
suggested that the price elasticity of demand for each product is:

Netbook: (-) 1.5; PC : (-) 2.5; Calculator:
(-) 0.6

You have been asked to evaluate the planned price
increases.

Comment on the planned price changes.

Would a 10% price reduction have been better for
some or all of the products?

What benefit (if any) would advertising bring to
the firm?

(You should support any arguments with
calculations.)

Question 3

A local firm produces three types of Pizza, for delivery to
homes in the area. The owners have completed research, to discover
the demand curves for each of the three pizzas. The schedules are
shown below: (Quantities are per week)

.

Price

Pizza A (Qd)

Pizza B (Qd)

Pizza C (Qd)

12

800

0

100

11

840

0

200

10

880

400

300

9

920

800

400

8

960

1200

500

7

1000

1600

600

6

1040

2000

700

5

1080

2400

800

Plot the three demand
curves, on one graph.

Calculate PED for all three pizzas over the price range £9 to
£10.

For
Pizza C only, what price must be charged if the
firm wishes to maximize its sales revenue?